• by David Kaplan , October 1, 2004

The popularity of DVDs has boosted movie studio revenues over the last few years, and they now seem poised to improve the fortunes of TV producers as well, with television series like Fox's "The Simpsons" and Comedy Central's "Chappelle's Show" posting stellar DVD sales, a study by Merrill Lynch's entertainment analyst Jessica Reif Cohen said.

For 2004, Merrill forecast consumer spending on TV DVDs at $2.3 billion in the United States, growing 30 percent a year to $3.9 billion in 2008. The investment bank's projections assumed that annual TV DVD buy rates will remain relatively constant at current levels of nearly 2 per-year per-household, although most industry analysts expect sales to rise more significantly.

On the question of whether TV DVD could compete with syndicated series that are both running on TV and also available for purchase, Cohen is sanguine that there will be no harm done.

"TV DVD is a new high-growth category that does not cannibalize other operating segments, the all-important syndication cycle in particular," Cohen said in her report. "Production budgets and the green-light process are also re-assessed as a result of this new back-end revenue stream."

Brad Adgate, senior vice president and corporate research director for Horizon Media, disagreed somewhat with that assessment. "I don't think it affects first-run shows like 'The Simpson's' or 'C.S.I.,' but it might affect off-net shows like 'Seinfeld' or 'Friends,' since there's little reason to tune in if you already own the show," he said. "And looking at the sales of DVD players--75.5 million since they first came on the market in 1997--I think sales of TV DVDs will continue to be strong, especially as people look to build up their home theater units."

Still, the prospects for greater TV DVD growth are not without potential pitfalls, Cohen said. The format does have its challenges, such as clutter, as a deluge of product comes to market.

Merrill Lynch noted that 550 TV DVD titles were released during all of 2003. By comparison, in the first six months of 2004, over 500 titles have been released. Of the 500 titles released year-to-date, only 18 titles have sold greater than 100,000 units, and the top 25 titles represent approximately 35 percent of sales during 2004.

But the studies nevertheless appear strongly poised to profit from TV DVDs over the long term no matter what. The market leaders Time Warner, News Corp., and Viacom--which collectively command roughly 70 percent U.S. market share of unit volumes--are best positioned to participate as these trends unfold.

"We consider it significant that [Viacom co-president] Les Moonves, who drove Warner Bros. Television to prominence in the 1990s has now taken control of Paramount TV," Cohen said. "Many of his key executives who helped build Warner Bros. TV followed by CBS are now in place at Paramount Television. We would not be surprised other studios ramp up their production efforts to capitalize on this TV DVD trend."